European shares extend losses as Greece headed for debt default

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* Euro STOXX 50 ends 1.3 pct lower

* Greece hours away from debt default

* Luxury sector hit by BofA Merrill Lynch downgrade

By Atul Prakash

LONDON, June 30 (Reuters) - European shares extended the previous day’s steep declines in choppy trading on Tuesday as Greece headed towards default on a crucial debt payment to the International Monetary Fund.

Greece pleaded for a short-term bailout extension in frantic efforts to salvage a deal that could keep Athens in the euro.

But German Chancellor Angela Merkel said Germany would not negotiate on a new bailout agreement for Greece before its planned referendum on Sunday, while a euro zone official said there was “no way” euro zone finance ministers would release funds for Greece to meet the IMF payment due by midnight.

“Greece was playing a game of poker and they lost because its creditors didn’t blink,” Koen De Leus, senior economist at KBC, said, adding that Sunday’s referendum was likely to increase difficulties for Greek Prime Minister Alexis Tsipras.

“If there is a ‘yes’ vote, Greece might see a new government and if the voters say ‘no’, then the country would head towards economic chaos.”

The euro zone’s blue-chip Euro STOXX 50 ended down 1.3 percent at its lowest in more than a week. It fell 4 percent this month, the biggest monthly drop in two years.

The index’s sell-off followed Monday’s slump of 4.2 percent, the biggest one-day percentage drop since late 2011, after Greece closed its banks and imposed capital controls on Sunday to check the growing strains on its crippled financial system, bringing the prospect of being forced out of the euro into plain sight.

In choppy trading, stocks opened lower and then turned positive by midday after a report saying Tsipras was considering a last-minute bailout proposal by the European Commission.

“All these mixed messages are making investors more nervous and there is potential for a lot more wobbles to go in the next few days,” Commerzbank equity strategist Peter Dixon said.

Underperforming the market was the luxury sector, with Christian Dior down 4.8 percent.

LVMH and Tod’s fell 3.9 percent and 1.5 percent respectively after all three firms were downgraded to “underperform” from “neutral” by Bank of America Merrill Lynch as it lowered earnings estimates for the luxury sector. (Additional reporting by Alistair Smout; Editing by Louise Ireland/Ruth Pitchford)